IRDA bans universal life plans of Max New York Life, Aviva Life, Bharti Axa Life and Reliance Life

The Insurance Regulatory and Development Authority (IRDA) has announced an overnight ban on all universal life insurance plans (ULPs). The regulator has told insurance companies that all current universal life plans will cease to exist from October 22.
Universal life plans are traditional life insurance products. However, unlike typical endowment products, the returns under these plans are not linked to ‘bonuses’ announced by the company. Also, these have similarities to unit-linked insurance plans (ULIPs) in terms of flexibility. Only four companies — Max New York Life, Aviva Life, Bharti Axa Life and Reliance Life — offer these plans.

One reason why ULPs have come under fire is because they are seen to offer a regulatory arbitrage to life companies. While it offers flexibility to ULIPs, there are no restrictions on charges that ULIPs are subject to. The result: Companies have built in high commissions into these plans. In a way, they also contain the shortcomings of both traditional and unit-linked insurance plans — high costs and curbs on returns.

In a circular to all insurance companies on Thursday, Irda released draft guidelines for new ULPs and informed companies that all current ULPs would cease to exist from the close of business on Friday. Irda has issued draft guidelines for new ULPs (variable insurance plans) and sought to get comments from companies before the end of the month.

Irda chairman had earlier made it clear that ULPs would be the next target of regulation. The move, however, has caught some companies off-guard. “It is very difficult to implement an order overnight since there are lakhs of agents, and policies would be at various stages of acceptance,” said an official of a private life insurance company.

Companies selling ULPs are expected to make a representation to the regulator seeking to buy time.

However, some CEOs feel the move merely aligns guidelines for ULIPs with those of ULPs and does away with the regulatory arbitrage that some companies had been taking advantage of. Another CEO of a private life company pointed out that in the past whenever Irda asked companies to stop selling a month or so in advance, companies have taken undue advantage of this and have actually pushed these products by positioning them as a “limited period offer”.